Financial Markets Freak Out When the Fed Hints It May Slow Down QE

U.S. financial markets are exhibiting the classic behavior patterns of an addict.  Just a hint that the Fed may start slowing down the flow of the "juice" was all that it took to cause the financial markets to throw an epic temper tantrum on Wednesday.  In fact, one CNN article stated that the markets "freaked out" when Federal Reserve Chairman Ben Bernanke suggested that the Fed would eventually start tapering the bond buying program if the economy improves.  And please note that Bernanke did not announce that the money printing would actually slow down any time soon.  He just said that it may be "appropriate to moderate the pace of purchases later this year" if the economy is looking good. 

For now, the Fed is going to continue wildly printing money and injecting it into the financial markets.  So nothing has actually changed yet.  But just the suggestion that this round of QE would eventually end if the economy improves was enough to severely rattle Wall Street on Wednesday.  U.S. financial markets have become completely and totally addicted to easy money, and nobody is quite sure what is going to happen when the Fed takes the "smack" away.  When that day comes, will the largest bond bubble in the history of the world burst?  Will interest rates rise dramatically?  Will it throw the U.S. economy into another deep recession?

Judging by what happened on Wednesday, the end of Fed bond buying is not going to go well.  Just check out the carnage that we witnessed...

-Dow Jones dropped by 206 points on Wednesday.

-The yield on 10 year U.S. Treasuries shot up substantially, and it is now the highest that it has been since March 2012.

-On Wednesday we witnessed the largest percentage rise in the yield on 5 year U.S. Treasury bonds ever.  It is now the highest that it has been in nearly two years.

-It was announced that mortgage rates are the highest that they have been in more than a year.

-We also learned that the MBS mortgage refinance applications index has fallen by 38 percent over the past six weeks.

If the markets react like this when the Fed doesn't even do anything, what are they going to do when the Fed actually starts cutting back the monetary injections?

Please note that the Fed's statement on Wednesday says that the current QE program is going to continue at the same pace for right now. In another article below I posted the statement and a video of Bernanke's press conference (you can watch it right here).

So why doesn't the Federal Reserve just stop these emergency measures right now? After all, we are supposed to be in the midst of an "economic recovery", right?

Rick Santelli of CNBC asked him a question on Wednesday: "Ben, what are you afraid of?"

If you have not seen his epic rant yet, you should definitely check it out...

On days like this, it is easy to see who has the most influence over the U.S. economy.  The financial world literally hangs on every word that comes out of the mouth of Federal Reserve Chairman Ben Bernanke.  The same cannot be said about Barack Obama or anyone else.

The central planners over at the Federal Reserve are at the very heart of what is wrong with our economy and our financial system.  Bernanke knows that the actions that the Fed has taken in recent years have grossly distorted our financial system, and he is concerned about what is going to happen when the Fed starts removing those emergency measures.

Unfortunately, we can't send the U.S. financial system off to rehab at a clinic somewhere.  The entire world is going to watch as our financial markets go through withdrawal.

The Fed has purposely inflated a massive financial bubble, and now it is trying to figure out what to do about it.  Can the Fed fix this mess without it totally blowing up?  Most severe addictions never end well.  In a recent article, Charles Hugh Smith described the predicament that the Fed is currently facing quite eloquently...

One of the enduring analogies of the Federal Reserve's quantitative easing (QE) program is that the stock market is now addicted to this constant injection of free money. The aptness of this analogy has never been more apparent than now, as the market plummets on the mere rumor that the Fed will cut back its monthly injection of financial smack. (The analogy typically refers to crack cocaine, due to the state of delusional euphoria QE induces in the stock market. But the zombified state of the heroin addict is arguably the more accurate analogy of the U.S. stock market.)

You know the key self-delusion of all addiction: "I can stop any time I want." This eerily echoes the language of Fed Chairman Ben Bernanke, who routinely declares he can stop QE any time he chooses.

But Ben, the pusher of QE money, knows the stock market will die if the smack is cut back too abruptly. Like all pushers, Ben has his own delusion: that he can actually control the addiction he has nurtured.

You're dreaming, Ben, pushing QE has backed you into a corner. The addict (the stock market) is now so dependent and fragile that the slightest decrease in QE smack will send it to the emergency room, and quite possibly the morgue.

We are rapidly approaching a turning point.  We have a massively inflated stock market bubble, a massively inflated bond bubble, and a financial system that is absolutely addicted to easy money.

The Fed is desperately hoping that it can find a way to engineer some sort of a soft landing to avoid a repeat of the financial crisis of 2008.

Federal Reserve Chairman Ben Bernanke insists that he knows how to handle things this time.

Do you believe him?

I don't.

Asian Stocks Tumble: China PMI Hits Nine-Month Low on Weak Demand

Asian shares tumbled to nine-month lows on Thursday as slowing Chinese manufacturing activity exacerbated sentiment already unnerved by the U.S. Federal Reserve Chairman Ben Bernanke confirming the Fed would begin reducing its stimulus spending later this year.

The "flash" HSBC China Purchasing Managers' Index contracted further to 48.3 in June from May's final reading of 49.2, hitting its weakest level since September as new orders faltered, reinforcing signs of tepid economic growth in the second quarter.

"The Chinese data confirms views that the economy is vulnerable and could heighten the possibility of some policy action to ease investor jitters," said Hirokazu Yuihama, a senior strategist at Daiwa Securities in Tokyo.

"It doesn't help markets, with the data coming after the Fed reinforced worries about funds leaving this region and repatriating back to the U.S.," he added.

MSCI's broadest index of Asia-Pacific shares outside Japan slid 2.8 percent after the data, its biggest one-day percentage drop in 13 months and lowest since May last year. The drop was around 2.5 percent before the Chinese data. Australian shares tumbled 2 percent while South Korean shares fell to seven-month lows. Hong Kong shares fell 2 percent and Shanghai shares slipped 0.9 percent.

The Australian dollar took a beating, falling to a low of $0.9240 after the Chinese data, as China is Australia's largest export market. The Aussie had already been hit by Bernanke's comments, sinking more than 2 percent to below $0.9300 for the first time since September 2010. The Aussie has been sold not only as a commodity currency but also as a proxy for emerging markets.

Asian credit markets also tumbled, with the spread on the iTraxx Asia ex-Japan investment-grade index widening by 23 basis points, reflecting the rising cost of hedging against debt default.

"We knew Asia would be pretty shaky if Ben had shown any signs of wanting to taper sooner than later, and so yes our credit market is melting," a trader said.

U.S. stocks tumbled more than 1 percent on Wednesday and benchmark 10-year U.S. Treasury yield surged to 2.37 percent, a fresh 15-month high, while the dollar advanced broadly on the back of the rising yields.

Bernanke said on Wednesday the U.S. economy is expanding strongly enough for the Fed to begin slowing the pace of its $85 billion monthly purchases of Treasuries and mortgage-backed securities, with the goal of ending it in mid-2014. But he also noted the central bank would withhold from tapering if economic conditions deteriorated.

"Bernanke was more explicit than markets had expected. Rising U.S. yields will spur broad dollar buying. The dollar's direction is now set," said Yuji Saito, director of foreign exchange at Credit Agricole in Tokyo.

"Volatility may stay high until bonds and stocks stabilise, but once the initial round of reaction subsides, markets are left with a clear direction," Saito said.

He said the contrast between Fed's shrinking balance sheet and the Bank of Japan's rapidly expanding holdings would spark the dollar to resume its climb against the yen.

Bernanke first raised the idea of a sooner-than-expected tapering on May 22, triggering global financial market turmoil especially in emerging markets, as the Fed's massive bond-buying programme has been a driving force behind the rally in risk assets globally.

Investors have been unnerved by the prospect of emerging economies or risk assets such as shares being undermined by outflows of money as the Fed curbed its stimulus, but others have noted that a stronger U.S. economy will eventually underpin investor sentiment and global economies.

"(Reduction of stimulus measures) is something the market has to get over. You cannot ride on four-wheel bicycles forever," said Kim Hyoung-ryoul, a market analyst at Kyobo Securities. "In time, confidence in U.S. economy will be restored ... we may see some short-term volatility as money will likely flow to U.S. markets."

Japan's benchmark Nikkei stock average fell 1 percent.

The dollar was up against the yen at 96.53 after rising to a high of 97.03 yen on Wednesday, moving away from its 10-week low of 93.75 yen hit last week. It remained well below last month's 4-1/2-year peak of 103.74 yen.

The euro eased 0.2 percent at $1.3272, off a four-month high around $1.3418 hit on Wednesday.

U.S. gold futures for August delivery fell more than 2 percent to $1,338.60 an ounce in Asia on Thursday. Spot gold fell 0.6 percent at $1,343.51 an ounce.

U.S. crude futures were down 0.9 percent at $97.40 a barrel and Brent also fell 0.9 percent to $105.22.

Awaiting the FOMC's Meeting

Be careful of what Ben Bernanke will tell us about U.S. monetary policy. After the Fed's two-day meeting, the market will be very attentive to the words of the president of the central bank of the United States.

Expectations about reducing purchases of bonds in its QE program are high, fueled by Bernanke's own statements, both as members of the Fed, as Bullard, who recognized the need to unwind the stimuli.

The effect has been really impressive, as we have seen yields on bonds rose sharply. In the emerging markets, currencies have fallen sharply against the impact it may have less liquidity in commodities. In fact, countries like Brazil and Indonesia have been forced to intervene.

For all these reasons, the expectations of the Fed on the U.S. economy are more optimistic than in other meetings, and therefore this is positive for the dollar.

I believe that the USD/JPY has the most upward path, after corrections produced by doubts about Abenomics policies.



S&P 500

The world looks to Wall Street, again. The index has a distinctly lateral movement while waiting for the Fed's meeting. With an average of 50 sessions almost flat and support levels at 1590 and resistance at 1641, we can not lose sight of the decision of the monetary policy. In the short term, the movement is expected to be lateral, as it is clearly shown in the chart.

The Bundesbank Generates Volatility and Uncertainty

Yesterday's session in the United States was marked by sales and volatility. The German Constitutional Court's deliberations and more especially the statements of the president of Bundesbank (German Central Bank), who allied himself with the usual doubts about the stability of asset purchase programs in the United States and Japan and left the major U.S. indices with average cuts of almost 1%.

What is worrying is the Bundesbank attitude of permanent and frank opposition to the initiatives of the ECB to overcome the crisis, being against any flexibility and realism that the economy is needing. Given the technical and intellectual respect that the Bundesbank deserves, I fear that their position is spreading distrust towards the ECB, fueling euroscepticism in German media and among the public opinion.

In the Asia-Pacific region, the session has been marked, one more day, by volatility. The Nikkei, which started downwards around -2% during the session and closed with a cut of -0.21%.

In Europe it begins with a mixed or red tone. CPI data known in Germany, Spain, France and Italy, without major changes.

This morning, we will know the employment data in the UK, which are expected to reduce unemployment claims, as the rate remains unchanged at 7.8% (this data can result in interesting movements in the pound against other currencies).

The Eurozone industrial production is expected slightly worse compared to the previous month (a reading better than expected could lead to an upward movement in a market that has endured heavy selling pressure over the past days).

In the United States, we will know the MBA mortgage applications of last week and data of last month's budget (not too relevant data). Remain vigilant to possible rebounds in equities after corrections we saw in the last two days, however, the bias seems to be confirmed as bearish.

It will be also remarkable the meeting of the Bank of New Zealand to be held this evening, although a cut in interest rates is not expected, but we should remain vigilant because it could result in significant changes in the currency and commodities.

ECB: A Bipolar Bank

ECB President Mario Draghi vehemently defended the actions of the institution he presides at the final meeting last Thursday.

And more specifically, the unconventional monetary policy, known by its acronym OMT, which are committed to purchase bonds of troubled countries if they previously request it.

Following a meeting in which they did not change interest rates and decided not to take any further action, President Draghi stated that in the absence of deflationary risks in the Eurozone (and the stability of peripheral debt markets), they decided to stay as they were.


Bond Purchases 'Only If Requested'

Mario Draghi defends bond purchases, although it has not been necessary yet, and it makes sense given the direct opposition exerted by the German representatives at the central bank and some of the politicians of that country. In fact, there is a demand in the German Constitutional Court, pending resolution, presented by German politicians, as they consider that this practice is illegal and outside the remit of the ECB.

But over-optimism, which is closer to empty triumphalism and, again, the feeling that conveys market inaction, or perhaps impotence, can be very harmful.


Risk Premiums Rising Again

In fact, after his statements, the peripheral European bonds fell and thus the risk premium was rising again.

The impression given in his appearance was to be more concerned about the approval of Germany, as he even expressed the hope that the German Constitutional Court would not oppose against the measure adopted by the central bank in Europe.

Fragmentation of the Market

If we add the setback in the talks about the banking union, another point that Mario Draghi stressed, and thus the impossibility of reaching monetary policies properly transmitted to the market, it is causing its fragmentation by uncertainty on the health of some financial institutions. And the result is pessimism.

Although estimates are made to improve the economy later this year, financial markets need a stronger action to restore confidence.

It is really worrying that bonds are being selled again, and risk premiums are rising, especially now that Japan, the country that has been active in this market and has given support to the debt, is floundering amid doubts about the effectiveness stimulus policies of the new executive.

Concerns Out

The European Central Bank needs to be more confident and more assertive in its statements. An independent central bank can not be worried about if its policy is approved in a country or a court.

The market expected a reinforcement in rate cuts that occurred in the previous meeting, and an explanation the promised measures to facilitate credit to SMEs.

What we don't need is indecision and timidity. The market is giving clear signals of what is needed to regain confidence, and if the ECB don't act, we could return again to unnecessary tensions.

12 Recession Indicators that Are Flashing Red

There are a dozen significant economic indicators that are warning that the U.S. economy is heading into a recession.  The Dow may have soared past the 15,000 mark, but the economic fundamentals are telling an entirely different story.  If historical patterns hold up, the economy is heading for a very rocky stretch.  For example, the price of copper is called "Dr. Copper" by many economists because it so accurately forecasts the future direction of the U.S. economy.  And so far this year the price of copper is way down. 

But that is not the only indicator that is worrying economists.  Home renovation spending has fallen dramatically, retail spending is crashing in a way not seen since the last recession, manufacturing activity and consumer confidence are both declining, and troubling economic data continues to come pouring out of Asia and Europe.  So why do U.S. stocks continue to skyrocket?  Will U.S. financial markets be able to continue to be divorced from reality?  Unfortunately, as we have seen so many times in the past, when stocks do catch up with reality they tend to do so very rapidly.  So you better put on your seatbelts because a crash is coming at some point.

But most average Americans are not that concerned with the performance of the stock market.  They just want to be able to go to work, pay the bills and provide for their families.  During the last recession, millions of Americans lost their jobs and millions of Americans lost their homes.  If we have another major recession, that will happen again.  Sadly, it appears that another major recession is quickly approaching.

The following are 12 recession indicators that are flashing red...

#1 The price of copper has traditionally been one of the very best indicators of the future performance of the U.S. economy.  The fact that it is down nearly 20 percent so far this year has many analysts extremely concerned...

Copper's downward trend foreshadows a stock market collapse, according to Societe Generale's famously bearish strategist Albert Edwards, who said equity markets will riot "Japan-style."

"Copper is acting exactly as it did when I wrote about the impotence of liquidity in the face of the (then imminent) 2007 recession. Once again it is giving us an early warning that liquidity will not save risk assets: time to get out of equities," Edwards wrote in his latest research note, on Thursday.

#2 Home renovation spending has fallen back to depressingly-low 2010 levels.

#3 As Zero Hedge recently pointed out, U.S. retail spending is repeating a pattern that we have not seen since the last recession...

Retail sales of clothing is growing at the slowest pace since 2010; but while major store sales are about to drop negative YoY for the first time in over 3 years, the utter collapse in general merchandise sales is worse that at the peak of the last recession at -5%. It seems tough to see how a nation with an economy built on 70% consumption is not in a recessionary environment. And while this alone is a dismal signal for the discretionary upside of the US economy/consumer; as Gluskin Sheff's David Rosenberg points out real personal income net of transfer receipts plunged at a stunning 5.8% annual rate in Q1. The other seven times we have seen such a collapse, the economy was either in recession of just coming out of one.

#4 Manufacturing activity all over the country is showing signs of slowing down.  In fact, Chicago PMI has dipped below 50 (indicating contraction) for the first time since the last recession.

#5 In April, consumer confidence unexpectedly fell to a nine-month low...

The Thomson Reuters/University of Michigan preliminary index of consumer sentiment declined to 72.3 in April from 78.6 a month earlier. This month’s reading was lower than all 69 estimates in a Bloomberg survey that called for no change from the March number.

#6 NYSE margin debt peaked right before the recession that began in 2002, it peaked right before the financial crisis of 2008, and it is peaking again.

#7 The S&P 500 usually mirrors the performance of Chinese stocks very closely.  That is why it is so alarming that Chinese stocks peaked months ago.  Will the S&P 500 soon follow?

#8 The economic data coming out of the Chinese economy lately has been mostly terrible...

For starters, China’s recent economic data, as massaged as it is to the upside, is downright awful. China’s PMI numbers were the worst in two years. Staffing levels in the Chinese service sector decreasedfor the first time since January 2009 (remember that year).

China’s LEI also shows no sign of recovery. If anything, it indicates China is heading towards an economic slowdown on par with that of 2008. And if you account for the rampant debt fueling China’s economy you could easily argue that China is posting 0% GDP growth today.

#9 Things just continue to get even worse over in Europe.  Unemployment in both Greece and Spain is now about 27 percent, and the unemployment rate in the eurozone as a whole has just set a brand new all-time record high.

#10 Crude inventories have soared to a record high as demand for energy continues to decline.  As I have written about previously, this is a clear sign that economic activity is slowing down.

#11 Casino spending is usually a strong indicator of the overall health of the U.S. economy.  That is why it is so noteworthy that casino spending is now back to levels that we have not seen since the last recession.

#12 The impact of the sequester cuts is starting to kick in.  According to the Congressional Budget Office, the sequester cuts will cost the U.S. economy about 750,000 jobs this year.

Top 1% Own 39% of All Global Wealth

According to a study that was just released by Boston Consulting Group, the wealthiest one percent now own 39 percent of all the wealth in the world.  Meanwhile, the bottom 50 percent only own 1 percent of all the wealth in the world combined.  The global financial system has been designed to funnel wealth to the very top, and the gap between the wealthy and the poor continues to expand at a frightening pace.  The global elite continue to hoard wealth and heap together enormous mountains of treasure in these troubled days even though the economic suffering around the planet continues to grow.  So exactly how have the global elite accumulated so much wealth?  Well, one of the primary ways is through the use of debt.  As I have written about previously, there is about 190 trillion dollars of debt in the world but global GDP is only about 70 trillion dollars.  Our debt-based global financial system systematically transfers wealth from us and our governments into the hands of the global elite.  And of course the gigantic banks and corporations that the elite control are constantly gobbling up everything of value that they can find: natural resources, profitable small businesses, real estate, politicians, etc.  Money, power, ownership and control are becoming very, very tightly concentrated at the top of the food chain, and that is a very dangerous thing for humanity.  When too much money and power gets into too few hands, it almost always results in tyranny.

What will eventually happen when the global elite have ALL the wealth?

Will the rest of us work as serfs in a system that they have iron-fisted control over?

And what if they decide that they don't really need billions of people working for them?  Will they decide to implement population control measures in order to reduce the number of "useless eaters"?  It is already happening in China and other highly centralized societies.

When all of the economic rewards of a society go to a very small handful of people, it tends to be very destabilizing.  We have seen this again and again throughout history.

When people have everything taken away from them and they have nothing left to lose, they tend to become very desperate.  And right now we are rapidly hurtling toward a time of great global instability.  Anger and frustration are growing all over the globe, and the rate at which the gap between the wealthy and the poor is widening seems to be accelerating.  Just check out these numbers...

-The wealthiest 1 percent of the global population now owns 39 percent of all the wealth on the planet.

-According to a report that was released last summer, the global elite have up to 32 TRILLION dollars stashed in offshore banks around the planet.

-According to a study conducted by Credit Suisse, the bottom two-thirds of the global population owns just 3.3% of all the wealth.

-A study by the World Institute for Development Economics Research discovered that the bottom half of the world population owns approximately 1 percent of all global wealth.

-It is estimated that the entire continent of Africa only owns approximately 1 percent of the total wealth of the world.

-Approximately 1 billion people throughout the world go to bed hungry each night.

-If you can believe it, more than 3 billion people currently live on less than 2 dollar a day.

In the world that we live in, money equals power.  And the more money that the top one percent accumulate, the more power they will accumulate as well.

So exactly who are the top one percent? The global elite are absolutely obsessed with power and control and they have been working to implement their agenda for a very long time.  In the end, they hope to unite the entire planet under a monolithic global system that they control.  They are actually quite open about this - it is just that most people do not want to believe it.

The gap between the wealthy and the poor is rapidly growing in the United States as well.  Sadly, this means that the middle class is steadily disappearing as the ranks of those that are living in poverty continues to increase.

But of course not everyone is doing badly in the U.S. right now.  In fact, those that own stocks have had lots of reasons to celebrate in recent months.

So who owns stocks?

Well, the wealthy do of course.  In fact, approximately 60 percent of all individually held stocks are owned by the top 5 percent of all Americans.

During the last recession, Americans lost 16 trillion dollars of wealth.  Since then, about 45 percent of that wealth has been "recovered", but the vast majority of that "recovery" has been due to rising stock prices.  The following comes from a recent Washington Post article...

From the peak of the boom to the bottom of the bust, households watched a total of $16 trillion in wealth disappear amid sinking stock prices and the rubble of the real estate market. Since then, Americans have only been able to recapture 45 percent of that amount on average, after adjusting for inflation and population growth, according to the report from the St. Louis Fed released Thursday.

In addition, the report showed most of the improvement was due to gains in the stock market, which primarily benefit wealthy families. That means the recovery for other households has been even weaker.

“A conclusion that the financial damage of the crisis and recession largely has been repaired is not justified,” the report stated.

Once upon a time, the United States had the largest and most thriving middle class in the history of the world.  That was a great thing.  But now the middle class is being destroyed and government dependence has surged to an all-time high.

The following are some of the incredible statistics that show how wide the gap between the wealthy and the poor in America is becoming...

-The wealthiest 1 percent of all Americans now own more than a third of all the wealth in the United States.

-In the United States today, the wealthiest one percent of all Americans have a greater net worth than the bottom 90 percent combined.

-According to Forbes, the 400 wealthiest Americans have more wealth than the bottom 150 million Americans combined.

-The six heirs of Wal-Mart founder Sam Walton have as much wealth as the bottom one-third of all Americans combined.

-On average, households in the top 7 percent have 24 times as much wealth as households in the bottom 93 percent.

-Between 2009 and 2011, the wealth of the bottom 93 percent of all Americans declined by 4 percent, while the wealth of the top 7 percent of all Americans increased by 28 percent.

-The poorest 50 percent of all Americans collectively own just 2.5% of all the wealth in the United States.

-The top 0.01% of all Americans make an average of $27,342,212.  The bottom 90% make an average of $31,244.

Obviously we have a huge problem here.

With each passing day, poverty is rising and more people are becoming dependent on the government.

Wildly Out Of Control

The financial system of the third largest economy on the planet is starting to come apart at the seams, and the ripple effects are going to be felt all over the globe. Nobody knew exactly when the Japanese financial system was going to begin to implode, but pretty much everyone knew that a day of reckoning for Japan was coming eventually. After all, its economy has been in a slump for over a decade, as it has a debt to GDP ratio of well over 200 percent and they are spending about 50 percent of all tax revenue on debt service.

In a desperate attempt to revitalize the economy and reduce the debt burden, the Bank of Japan decided a few months ago to start pumping massive amounts of money into the economy. At first, it seemed to be working. Economic activity perked up and the stock market went on a tremendous run. Unfortunately, there is also a very significant downside to pumping your economy full of money. Investors start demanding higher returns on their money and interest rates go up. But the government cannot afford higher interest rates. Without super low interest rates, Japanese government finances would totally collapse. In addition, higher interest rates in the private sector would make it much more difficult for the economy to expand. In essence, pretty much the last thing that Japan needs right now is significantly higher interest rates, but that is exactly what the policies of the Bank of Japan are going to produce.

There is a lot of fear in Japan right now. On Thursday, the Nikkei plunged 7.3 percent. That was the largest single day decline in more than two years. Then on Monday the index fell by another 3.2 percent.

And things are not looking good for Tuesday at this point... The Nikkei has dropped by another couple hundred points, below the 14.000 level.

Is this the beginning of a colossal financial meltdown? The Bank of Japan is starting to lose control, and if it goes down hard the crisis could spread to Europe and North America very rapidly. The following is from a recent article:


"As Japan has indicated, when bonds start to plunge, it’s not good for stocks. Today the Japanese Bond market fell and the Nikkei plunged 7%. The entire market down 7%… despite the Bank of Japan funneling $19 billion into it to hold things together

This is what it looks like when a Central Bank begins to lose control. And what’s happening in Japan today will be coming to the US in the not so distant future.

If you think the Fed is not terrified of this, think again. The Fed has pumped over $1 trillion into foreign banks, hoping to stop the mess from getting to the US. As Japan is showing us, the Fed will fail.

Investors, take note… the financial system is sending us major warnings…

If you are not already preparing for a potential market collapse, now is the time to be doing so."


And all of this money printing is absolutely crushing the Japanese yen. Since the start of 2013, the yen has declined 16 percent against the U.S. dollar, even though the U.S. dollar is also being rapidly debased. Just check out this chart of the yen vs. the U.S. dollar. It is absolutely stunning...

The term "currency war" is something that you are going to hear a lot more over the next few years, and what you can see in the chart above is only the beginning.

What the Bank of Japan is doing right now is absolutely unprecedented. It has announced that it plans to inject the equivalent of approximately $1.4 trillion into the Japanese economy in less than two years. What they're doing represents 70% of what the Fed is doing here with an economy 1/3 the size of ours.

The big problem for Japan will come when government bond yields really start to rise. The yield on 10 year government bonds has been creeping up over the past few months, and if they hit the 1.0% mark that will set off some major red flags.

Because Japan has a debt to GDP ratio of more than 200 percent, the only way that it can avoid a total meltdown of government finances is to have super low interest rates.

It really is very simple. If interest rates rise substantially, Japan will be done.

"If rates go up, it's game over."

The financial problems in Cyprus and Greece are just tiny blips compared to what a major financial crisis in Japan would potentially be like. The Japanese economy is larger than the economies of Germany and Italy combined. If the house of cards in Japan comes tumbling down, trillions of dollars of investments all over the globe are going to be affected.

And what is happening right now in Japan should serve as a sober warning to the United States. Like Japan, the money printing that the Federal Reserve has been doing has caused economic activity to perk up a bit and it has sent the stock market on an unprecedented run.

Unfortunately, no bubble that the Federal Reserve has ever created has been able to last forever. At some point, we will pay a very great price for all of the debt that the U.S. government has been accumulating and all of the reckless money printing that the Fed has been engaged in.

So enjoy the calm before the storm while you still can.

It won't last for long.

Better Prospects for the Euro

As expected last week, the dollar has been losing ground in view of the statements of Fed members, who are mostly more favorable to maintain QE policies as long as needed.

And the final confirmation has come this afternoon in Bernanke's appearance:

“A premature tightening of monetary policy could lead interest rates to rise temporarily, but also would carry a substantial risk of slowing or ending the economic recovery.”

I think that the dollar should further correct and the EUR/USD may again exceed the critical level of 1,30. We will see a technique confirmation if the dollar index closes below 83,40.

In addition, in Europe the peripheral risk premiums remain fairly stable, and they are likely to improve, especially after the publication of new data about the current account deficit of the eurozone in March, which has improved substantially over the previous month's figure. A sustained surplus will undoubtedly enhance the credibility of public finances and also for the bonds of the countries concerned. On the negative side, I see that these improvements are based largely on the decline in imports, but the ultimate effect, referring to foreign debt, remains favorable.

For this reason, the EUR/USD is likely to resist its downtrend rally and it can be kept above the level of 1,30. The USD/JPY could also correct its price, so we must be careful with the 102,00 and 101,80 levels, whose break would open new extensions to downward trend.

Be Careful with Bernanke

Last weekend I wrote that a new sentence in the statement of the Federal Open Market Committee could announce changes. With Bernanke's observations, such changes may be on the way. Moreover, the ECB may be moving too - just in the opposite direction.

I will not call Bernanke a "hawk". But it is already said. (A "hawk" is someone who tightens rates to beat inflation and doesn't care about unemployment).

In view of the low rate of current interest, I am paying particular attention to examples of "extend the scope" and other forms of excessive risk that could affect the price of assets and their relationships with the fundamentals.

You can not ignore nit. I don't believe that Bernanke's views changed from the overnight, but a mere mention of the disadvantages of this policy could be seen as an early sign of reversal. While the FED may not be in a hurry to openly comment the future of QE, for investors operating EUR/USD both sides of the equation are equally important, especially since Draghi opened the door to the discount rate during the last conference.

The short-term trajectory of the U.S. dollar is up and the Euro down. Both trends are based on macroeconomic data, and some changes in nominal fields will not be important. However, since monetary policy is the key to the exchange rates, the direction for the most important exchange in the world seems to be clear.

Is this Rally for Real?

Not much action following the new Dow high. Not much follow-through. But not a big breakdown either. As near as I can tell, stocks have been driven up by the Fed’s easy money. Investors expect more easy money, so they think stocks will go up more.

What surprises me more is how optimistic the young investors are. They think stocks always go up:

"I'm 36 years old," one explained. "That means I was too young to get in on the boom of '82-'00. All I’ve seen are stocks going up and down. They’re just a little bit higher today than they were in 2000."

"But when I look back on the history of the stock market, what I see is a market that takes big leaps forward… Then we get a period in which prices don’t go anywhere… And then we get another big leap ahead. I want to be sure I don’t miss that next big move to the upside."

His reading of stock market history is much different from mine. What I see is a market that, in inflation-adjusted terms, goes up, and then goes down. It can go up for decades and down for decades. The next big move to the upside might not begin for another five to ten years. In the meantime, investors could lose half or two-thirds of their money.

Then again, there may never be another major bull market cycle for all we know. The bull market of the '50s and '60s was based on growth and output expansion, and in the '80s and '90s it was based on credit expansion.

What will drive the next bull market? Growth has slowed to a crawl. Credit cannot expand forever. Are the big bull markets over? I don’t know. But I wouldn’t stake my financial futures on catching the next one anytime soon.

“But stocks have been going up since 2009,” replied the young man. “Companies have record profits. There are lots of new technologies and innovations coming online. I don’t see any reason for this bull market to end. It could go on for many years.”

Yes, it could. But this is a market driven by an illusion created by phoney money.

“Aw, c’mon… the Fed’s new money is just the same as the old money.”

Well, yes... and no. Each of the old dollars represented a certain amount of goods and/or services. That amount was measured by the 'price' of things. Now, the Fed is adding more dollars – at a rate of $85bn per month. Other central banks are doing the same with the Bank of Japan (BoJ) leading the way. The BoJ is adding, proportionately, much more money that the Fed.

At the same time, the economy is not adding anywhere near as much in terms of goods and services. Real private-sector output is about the same today as it was ten years ago.

This is what makes this new money much different from the old money. It comes with no new output behind it. So it will inevitably and eventually have to come to bear on existing output, not new output. The only result can be higher prices. How much higher? No one knows. It depends on the velocity of money, which depends on how the economy is doing and how eager people are to get rid of their dollars.

One way or another, the dollar will be worth less than it is today. How much less? Only time will tell.

FED's Meeting

A lot or a little phrase meaning:

In January 2003, the statement of the Federal Open Market Committee consisted of 118 words. In March 2013 it contained 560. Last week, the Committee added another sentence.

A decade ago, the Federal Reserve's messages were refreshingly simple: the decision, key variables, and a short prognosis. A policy tool without vague considerations. The statement served to convey a message in a blink. With Bernanke things have changed. Statements have not stopped growing since the policy became much more complex in order to "communicate" with the markets. The process continued at the last meeting when an additional sentence was added:

"The Committee is prepared to increase or decrease the pace of its purchases to maintain an appropriate period of policy accommodation while the outlook for the labor market or inflation changes."

The question is: why? Is not something you already knew and understood?

"While determining the size, pace, and composition of its asset purchases, the Committee will continue to take the appropriate measures (...) to progress towards economic objectives."

However, since this is the only change in the long statement, there must be a good reason. At first glance it may appear as the first is a small step towards the exit of QE - this is something that some members of the Federal Open Market Committee have been asking since 2012. But the Committee seems to be dominated by some members that may have seen an opportunity in the March employment data to include the message, which possibly can work to their advantage (in case of slow improvement in the labor market and less inflation, another increase in QE could be necessary).

Whatever the reason, the April unemployment data only 1% above the "rising target" has provided them with convincing arguments. If the data of next month continues this trend, the FED meeting in June could be very interesting.